Effect of Exchange Rate on Inflation in Nigeria
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Date
2022-12
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Lead City University
Abstract
This study was conducted to examine the effect of exchange rate on inflation in Nigeria. This was carried out as a result of the contradicting views on the influence of exchange rate on inflation rate in Nigeria. The study utilized secondary data from 1981 - 2020 and performed Augmented Dickey Fuller(ADF) and Phillip-Perron (PP) unit root tests to determine the stationarity of the variables used. TheGranger Causality Test and ARDL model were used as the method of analysis. The results of the unit root tests indicate that the variables were all stationary at the first level of difference, except for the GDP growth series which was originally stationary.The Granger causality tests revealed that, there is bi-directional causality between exchange rate and inflation rate in Nigeria. In addition, the result of the ARDL showed that there is co-integration relationship between official exchange rate and inflation in Nigeria. It was further found that the causal effects of other major macroeconomic variables on inflation in Nigeria revealed that there is no granger causality relationship between GDP growth and inflation, likewise between unemployment rate and inflation. Based on the empirical evidence of the study, it can be concluded that the official exchange rate could not impact any significant influence on inflation rate, even though there is causality because the official exchange rate behaves differently from the real exchange rate and the parallel price.In view of the realities of casual relationship between the official exchange rate and inflation in Nigeria, it is recommended that the government should create an environment that encourage investmentby putting in placegood infrastructures, security which willboost the nation's productivity and reduce capital flight.
Keywords:Inflation, Exchange Rate, Unemployment Rate, Economic Growth
Word Count: 280
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Kate Turabian